The Winners and Losers in the Superannuation Industry

‘After reading Vern’s article on Buffet and index funds, I was hoping you may be able to write some words of wisdom on the Super industry and advertising their funds. How are individuals who have their super in a fund helped, when that super fund spends money on big TV ads?

‘Surely these funds are already so big that there is no significant gain to be had by economies of scale. The only gain by advertising that I can see is for the managers of the fund not the investors. What are your thoughts on this? Cheers Steve’

I am not sure about the words of wisdom but hopefully a picture can be painted as to why member funds are being spent ad (pun intended) nauseam.

The winners and losers in the superannuation industry are clearly evident in the chart below (courtesy of the November 2012 KPMG Evolving Superannuation Industry Trends Report).

SMSF and Industry funds are squeezing out market share from the original providers of superannuation (corporate, public sector & retail).

SMSF and Industry funds are enjoying much larger slices of the $1.6 trillion super pie. This pie is set to grow even larger as compulsory contribution levels rise (even though some of this increased input will be offset by retiring boomers moving into pension phase).

My suspicion is retail funds (Colonial First State, BT, MLC etc.) are experiencing a dwindling in market share due to the very effective campaign by the industry funds focusing on costs (especially the payment of trailing commissions to financial planners).

While the Industry fund campaign has been very effective in nullifying their retail competition, they have not laid a glove on the higher net worth SMSF sector. The reason for this becomes apparent when you drill down into the numbers.

The following chart (also from the KPMG report) shows there is daylight between the average member balance in an SMSF compared to the other players in the super industry.

The harsh reality is the retail and industry funds are fighting over the scraps while the cream has migrated to self managed.

Given that the majority of SMSFs have a least two members, it is fair to assume at least $1 million is housed in the average SMSF. At this level, economies of scale kick in and make it almost impossible for public offer (retail and industry) funds to retain members with higher balances.

The following chart from the 2013 OECD Report on Global Pension Funds shows the average operating expenses for Australian pension (superannuation) funds is 0.8%. Relative to the rest of the developed world, Australia is one of the most expensive provider of pension funds.

An interesting question for the industry to answer would be ‘Why is it that New Zealand with a smaller population and less funds under management charges 0.6%?’

If we bring all this information together you begin to see why the industry and retail funds are spending member funds lining the pockets of the ad agencies.

With an average member balance of $22,000, an industry fund (@ 0.8%) makes $176 per annum per member. For this the member receives a quarterly statement, online access to switch between asset classes and a newsletter or two.

Consider an industry fund member and their spouse/partner each with a $500,000 account balance – they are EACH paying $4000 (there may be a slight reduction for larger amounts) for the same service as the member paying $176.

It’s a no-brainer when you do the numbers. Shell out $8000 for a homogenised one size fits all strategy or rollover to your own self managed super fund with the ability to tailor your portfolio to your risk profile and investment preferences (fully franked shares, direct real estate, term deposits etc.) for a fraction of the costs associated with public offer funds.

As an over-simplification, the following example demonstrates why the leakage of larger member balances is harming the bottom line of public offer funds.

A public offer fund has 50 members with a total of $1m under management. The member base is made up of – 1 member x $510,000 and 49 members x $10,000.

Based on a 0.8% annual operating expense, the fund receives $8000 in fees – $4080 from 1 member and $80 each from the remaining 49 members. The larger members are subsidising the services provided to members with far lesser balances.

The public offer funds have lobbied Government very hard to tighten up the regulations surrounding SMSFs. The lobbying has been cloaked with a concern for members being ill-prepared to handle the responsibilities of managing their own retirement capital.

Whereas the reality is far more about self-interest. The public offer industry is hoping to place sufficient regulatory impediments in front of those remaining high valued members considering a switch to an SMSF.

My guess is the regulatory regime surrounding SMSF will tighten up but not to the extent it will be a deterrent to those who wish to manage their own retirement capital at substantially lower costs.

Some of the headwinds the public offer funds face are:

Another severe market downturn – with over 60% of your average balanced fund in shares a market downturn of 50+% will inflict a world of pain on members with larger balances. The primal response to this will be ‘stuff it. I can do a better job than this’ and the exodus gains momentum.

New online SMSF administration and auditing services are driving establishment and annual costs much lower – well under $1000. The wide held belief is an SMSF is only cost effective for those with combined balances exceeding $250,000 to $300,000. These new online services offering annual admin and audit services for $800 changes that perception. Two members with a combined balance of $100,000 are paying $800 (0.8%) in a public offer fund. The advent of technology driving costs lower threatens to eat further into the member base of public offer funds.

Generations X&Y are tech savvy, very independent and extremely cost conscious. These are the members whose balances are going to grow with rising mandated superannuation contributions. Public offer funds need to retain this demographic but are fighting an uphill battle.

In a case of ‘if you can’t beat ‘em, join ‘em’ I suspect the Industry funds will expand their product range to offer a quasi-SMSF style product.

The above analysis is a glimpse of the industry insight and macro factors impacting superannuation, the global economy and investment markets Gowdie Family Wealth provides its readers.

So back to Steve’s original question, yes the funds are big but they are under constant attack. The cost issues and society trends dictate a concerted effort is required to minimise the leakage of the bigger account balances. Get used to it, Industry Funds are destined to continually spend member funds advertising their product.

If the ads are an annoyance, here’s a tip. The thrust of the industry fund advertising is ‘the industry super fund member balance goes up while the retail member balance goes down’. You have the same choice with the volume and channel control buttons on your remote.

Vern Gowdie has been involved in financial planning since 1986.
In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.
His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia.
He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback.
His contrarian views often place him at odds with the financial planning profession.
Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction.
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